Are you a Traditional or a Roth?

retirement.gifAs many of you know, the importance of investing is crucial. Since investment is tied with time, it’s also obvious that the sooner you start your investment portfolio, the better and bigger your outcome.

Today we’re going to look at the individual retirement account, or also known as the IRA. In short,  IRA is an personal, tax-advantaged retirement plan. An employed person can contribute earned income into an IRA account up to $4,000 per year if you’re younger than the age of 50 and $5,000 if you’re over. In 2008 this amount will increase by a thousand dollars. If you need some more information on IRA accounts, you can get more details here.

Although there are more than just two types of IRA accounts, I want to just pick on Traditional and Roth today.

So how do you know what account is best for you?

If you compare a Traditional IRA with a Roth IRA, a Traditional IRA may be a better move for you than a Roth IRA if you:

  • Don’t qualify for a Roth because of your income level but still want the tax deferral on earnings in a Traditional IRA.
  • Believe that income tax will decrease in the future.
  • Expect to be in a lower tax bracket during retirement.
  • Qualify for a tax-deductible IRA contribution.

Now, if you compare a Roth IRA with a Traditional IRA, a Roth IRA may be a better choice than Traditional if you:

  • Anticipate remaining in your current tax bracket after your retirement.
  • Believe that income tax will increase in the future.
  • Expect that when you retire, you will be in a higher tax bracket.
  • Have income below the MAGI limit for a Roth IRA, but still too high to qualify for a deductible Traditional IRA.

Even though you may have an idea on what kind of account you’re interested in, its always a good idea to ask your personal finance advisor and seek their opinion. From personal experience, they always seem to have some useful information.

  1. Career Advice by Randy - trackback on June 18, 2007 at 11:28 am

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